POSTED BY January 2, 2014 10:52 am COMMENTS (7)

ONDear Experts,

I wish to know whether there is any benefit in selecting an EMI date early in the month as compared to late in the month. Does the loan get repaid earlier i.e. is the interest paid less in any particular scenario. I did a math on my home loan taking the minimum interest possible and the maximum interest possible.

I did it for 1 year and found out that there was a difference of about 2650 rs when I took the starting principal of about Rs 24lacs, ROI at 8% and EMI of Rs 32000, paying early in the month being beneficial. Is this calculation correct? Will the gap widen over a long term of 20-30 years? Is it worth changing the EMI date to an earlier date?

Please Help

Kishan

Dear Kishan, Being a daily reducing balance loan, if any prepayment was made in between, it was giving the benefit of lesser loan amount for remaining period of a Term loan. I have received your mail and ‘ll try to check and answer it today as I’m going on vacationf rom tomorrow. 🙂

thanks

Ashal

Dear Ashal,

Even in the term loan the interest is debited on the last day of the month and the interest component of the EMI helps in reducing interest at the time of calculation at the end of the month. For example if the outdstanding amount is Rs 10 lacs at the end of Dec 2010 and an EMI of rs 25000 gets deposited on 15th of Jan 2011 the the interest debited to the account on 31st jan is calculated as follows (ROI taken 10% for ease of calculation):

Principal is 1000000 for 14 days (Jan 1st to Jan 14th) and interest for 1st 14 days will be 1000000 x 10/365 x 1/100 x 14 = 3836. This is not yet debited to account.

On 15th the EMI is deposited so principal outstanding becomes 1000000 – 25000= 975000

For next 17 days (jan 15th to jan 31st) the principal outstanding is Rs 975000 and interest will be calculated on this amount in a similar way: 975000 x 10/365 x 1/100 x 17 = 4541.

Thus total interest which will be debited o to the account on 31st jan will be 3836 + 4541 = 8377 and then the principal outstanding increases by this amount and becomes 975000+8377 = 983377.

This is how interest is calculated in term loan and I am sure it is same in Maxgain also. I have had term loan in past and have maxgain at present. This is the method bank is calculating interest in both the accounts. Please explain if I seem to be incorrect

I have sent the excel document showing difference of interests incurred by changing the date of EMI, to your personal ID

Thanks

Kishan

Dear Kishan, NO. The counting method is same i.e. daily reducing but actual debit of interest happens late in max Gain on last day of the month. Hence even the interest part of EMI lying in OD account to be debited on last day, itself helps in bring down the interest outgo. The same is not there in Term loan.

Thanks

Ashal

Dear Ashal,

I think the mode of calculation is same in both Maxgain and Term loan is same i.e. daily reducing method. The only extra benefit of MG is liquidity of the amount. Rest all the features are same. Therefore, if the effect of EMI date is present, then it would be present in both types of accounts and not in only MG account. I had done the calculations on paper not in excel. I shall do it in a tabular format and mail to your personal id

Dear Shankaranad, in case of Max Gain, interest is charged separately, hence there is a possibility of benefit in an early date. In case of Term Loan, the dedcution of interest happens on the EMI date itself, hence it does not matter in the whole month, when the EMI is getting credited to loan account.

Thanks

Ashal

According to my calculations, for SBI Maxgain there is definitely an advantage of having an earlier EMI date since the interest deduction date and the EMI date are different. Interest deduction from the OD account always happens on the last day of the month and the EMI credit into the OD happens as scheduled. The earliest EMI date that SBI is willing to offer is 5th of every month.

Dear Kishan, can you share your calculations over my personal mail ID? In my personal opinion, there should not be a major impact on loan closure due to EMI date change.

Thanks

Ashal